2015.06.0223:03:00UTC+00Moody's: Government Rail Investment a Key Credit Support for selected Chinese Issuers

Moody's Investors Service says that continued heightened investment by the Chinese government (Aa3 stable) in the country's railway network will be credit positive for the industry and eligible companies.

China's rail spending totaled RMB808.8 billion in 2014, the highest since 2011.

Moody's expects the government's railway investment to be at a high level of about RMB800 billion per annum in its next five-year plan (2016-2020).

Eligible rail construction and equipment manufacturing groups will be immediate beneficiaries of the investment, with some construction machinery groups, communication equipment suppliers and construction materials companies also benefiting.

"We believe China's government will play an active role in supporting rail-related companies to execute their expansion plans home and abroad," says Amanda Du, a Moody's Vice President.

Du co-authored the Moody's sector-in-depth report "China Railway Sector: Government Rail Investment Is a Key Credit Support for Selected Chinese Issuers", which has just been released.

Rail development serves important social and economic functions and, as China's economy rebalances, rail investment is becoming increasingly important for growth.

Therefore, to stimulate slowing economic growth, China's government has a strong incentive to support massive railway capital expenditure.

In addition to the direct impact on GDP growth, rail investment plays a key role in developing new towns, industrial zones and replacing the more polluting road transport. Furthermore, rail construction is an integral part of China's "One Belt One Road" policy, which aims to link China to Europe through central and western Asia.

China Railway Corporation (unrated), formerly the Ministry of Railways, and regional rail companies rely on debt financing and government grants to fund capital expenditure.

"As such, rail companies will continue to rely on government grants and debt financing for expansion. Given the large funding needs, rail companies have an incentive to explore new funding channels, including offshore bond markets, to diversify funding sources and reduce funding costs," says Ivan Chung, a Moody's Senior Vice President.